IBNA Analysis/ Banks and the financial system in front of money laundering

IBNA Analysis/ Banks and the financial system in front of money laundering

The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a standard way, regardless of specific features of different cases

By Prof. Dr. Adrian Civici

Money laundering is the process that consists in concealing or legal deviation of earnings, or money coming from illegal activities, with illegal, criminal or mafia nature, such as: drugs, prostitution, arm trade, money earned from corruption, financial speculation and fraud, informality, fiscal evasion, etc.

The ultimate aim of money laundering is transforming such money into “honest and clean” money, legitimate profits, and consequently, their normal use in legal financial and economic activity. Money laundering is currently a widespread phenomenon, but in the same time, so much at the spotlight of national and international authorities.

It is worth mentioning that actually, according to the IMF, approximately 2 – 5% of global GDP is circulating as dirty money. When put into figures, this means that, US 2.5 to 3.5 trillion (World GDP in 2014 was US 75 trillion) are produced by illegal and criminal sources.

In its formal meaning, the term “money laundering” comes from the fact that the illegally earned money, whatever the methods pursued, is called “black finance”, which includes mafia and criminal activity, etc. “Cleaning” serves such money to gain the equal status as the legal money, so not having compromising “stains”.

The term “money laundering” commenced to become part of everyday vocabulary during 70s, at the time of the “Watergate” scandal in US, whereas it took the real legal meaning and content in the early 80s. From a historical perspective, there are several explanations for this term. They connect its origin with a Mafia family in Chicago of ’20s, which possessed a wide chain of “Sanitary Cleaning Shops” laundries, which was used as a legal facade for recycling money, i.e. to “clean” the money earned from illegal activities of all kinds.

The phenomenon was openly discussed during the trial of Al Capone, who was sentenced for tax fraud and money laundering, despite having numerous crimes in his CV, as well as during trial processes against mobsters, like: Luciano and Lansky, during the years 1930-40 in US. Also, in the medieval Europe of XIII-XVI there existed two currencies: the shining gold and silver coins, which were the main means of payment and metal coins, which had a low value and blackened, which were used by ordinary people, which in most cases, were unregistered and without clear statistics about them.

The question in place is: is there any standard model, or known general way, how money is laundered, or any individual case means a different and unique improvisation? In this regard, the answer is standard, already. Money laundering, more or less, follows a standard way, regardless of specific features of different cases. Firstly, by “investing” or putting money into circulation, in the form of investments, bank deposits, financial transfers, casino or games of chance cheques, etc., which means “introducing them into the legal financial and monetary system”.

Secondly, separating or detaching those money from their origin and initial source and distributing or circulating them through various transactions, commonly called as “financial fabrications” or “Waltz of transfers”, aiming at concealing and losing the tracks of origin. Such types of operations are made with support from banks, through tax havens, financial companies, insurance companies, investment funds, speculative share transfers, earnings, expenses, casinos and other games of chance, etc.

Thirdly, by joining up several “pieces” of such money, now as “clean money” and legitimating them as pure investments, in business areas, such as: real estate, construction, charity funds, investment funds, sports, fashion and media, stock exchange investments, purchasing luxury objects, etc.

If we talk about improvisation, we may say that modern methods of money laundering keeps being more sophisticated and complex, thus making their illegal and criminal nature even more complicated. International specialized institutions, such as: the IMF, or other intergovernmental organizations, publish regular studies which explain techniques and methods used in the field of money laundering. Nothing is unknown. The money laundering issue is part of the economic, financial and monetary globalization, operating through well-organized networks. “Fiscal heavens” are, also, a quite specific phenomenon. The international criteria that identify them are three: very low taxes or total absence of taxes; the lack of any transparency of the fiscal sys tem; and a full banking and fiscal secrecy, by not cooperating with any country, in this regard. There are also distinctions between tax havens and financial havens, banking havens, investment havens, etc.

These include typical “money laundering” countries, which include even some developed countries, which tolerate specific aspects of money laundering. This is so fluid, as each country publishes a list of suspected countries or territories for carrying out such activity.

The “hunt” for dirty money is being transformed from capturing dirty money of mafia’s criminal origin and blocking their legal recycling, into finding and revealing hidden profits, profits which come from political clientelism, corruption, tax evasion, transferring public funds to personal activities, etc. In the battle at international scale against the process of money laundering, fiscal heavens and financial sophistications still provide opportunities and playing field to develop such activity. Banks have an important role in the prevention of money laundering.

The positive experiences and specific laws that exist in this regard clearly require banks to report to law enforcement agencies or specialized structures the operations and the identity of respective authors who are doubtful; to declare operations and transfers in which the beneficiary is dubious; to identify non-typical financial and monetary operations, carried out by individuals, organizations or businesses which consist in frequent and unjustified changes of company’s charter, organizational setup, and properties, or financial operations that are not related to their legal activity, as it is known until recently; to discover unjustified operations, in the form of real estate transactions, executed at “strange” prices, fund deposits without any known or justifiable source; to run special control software for “best practices” in their daily activities, etc. There is a widely-discussed theory, in public opinion, and in some cases within institutional or academic environments, that “many countries have benefited from the money laundering process, especially when they are not the country of origin.” It is true that “host” or “circulating” countries for dirty money may have financial benefits, especially the “intermediary operators”, i.e. those who carry out the laundering process.

About 20 – 25% of the amount of laundered money is the “reward” for such intermediaries. Certainly, a chunk of dirty money is invested as clean money in these countries and it is assumed that they develop the economy or stimulate consumption in these countries. International experiences and specific studies have proven that, if tolerated, money laundering is a negative phenomenon with serious long-term consequences, because: it prevents the development of formal and legal private sector, which is faced with unfair competition; it causes confusion and uncertainty in monetary flows and exchange rates in the money markets; it creates instability in the financial markets and reduces the reputation of banks and financial institutions in general, going up to the point of provoking bankruptcy or serious structural crisis to them; it reduces fiscal revenues in the country where it takes place, as incomes produced by actions related to money laundering are mostly carried out underground; dirty money converted into legitimate one, is increasingly used in criminal, informal activities or to corrupt the political classes or senior managers; laundered money is used to create clientelist or criminal parallel powers, out of the market, government, law and citizens, thus making a corruption quite powerful; the more easily money is laundered in a country, the greater the incentive for informal action, abuse of power, cronyism, law infringement, etc.; many of major financial scandals that have occurred in the world, like: “Enron” in US, “Parmalat” in Italy, “Prestige oil tanker” with Swiss capital, “Elf issue” in Africa, “Glencore issue” of the steel multinational, etc., have clear cases of money laundering operations. For this reason, the issue of prevention of money laundering is considered the “Achilles Heel” for a healthy and sustainable capitalism. Is Albania immune from the money laundering phenomenon? Albania has some “specifics”, when talking about the money laundering phenomenon.

Firstly, like many other ex-communist Eastern Europe countries, it has a bit of more than two-decade timeframe facing such completely new phenomenon, for its experience and tradition. As such, it is, in many cases, “an easy prey” for “old masters” in this field.

Secondly, the process of prevention of money laundering is not just a goodwill or political determination, but is closely related to the establishment and strengthening of specific institutions for this purpose, with drafting a series of laws, regulations and specific measures, accompanied with proper qualifications of specialized human resources.

Finally, the will for preventing or detecting and punishing money laundering should not be amateurish, selective, temporary, politicized, or ill-funded, which means that specialized institutions in this regard must have maximum legal, political and financial support.

The important problem, which has to do with the quality of detecting and preventing money laundering, is going from reasonable doubts to defining the direct connection with the originating job of dirty money. Albania has a good law against money laundering and terrorist financing; it has a special unit of financial intelligence: the General Directorate for Prevention of Money Laundering, which is well-coordinated with its international counterparts and regulators, and cooperates effectively with supervisory authorities, especially he Bank of Albania and Financial Supervision Authority.

The monetary and financial institutions and stakeholders are establishing the institutional culture and order to identify and report cases, according to legal criteria, related to money laundering activities. Albania has a special law “On prevention of financing of terrorism”. It is a positive fact that in 2015, Albania is no longer part of the group of countries that are under constant monitoring for money laundering and financing of terrorism.

This is one of the conclusions of the report of Onsite Team group of ICRG. Albania is considered that it has fulfilled all shortcomings, reported during past years by FATF (Financial Action Task Force), which monitors the implementation of measures against money laundering and financing of terrorism in the world.